Investor skepticism on GameStop's bitcoin decision; Another reason to avoid AppLovin; Beware of speculating in high-risk, high-reward private companies; 'One-hit wonders' from the COVID-19 era
1) It appears that other investors share the skepticism I expressed in yesterday's e-mail about GameStop's (GME's) pivot toward being a bitcoin play...
As I noted, shares of the video-game retailer surged nearly 12% on Wednesday in the wake of the news, but then gave back those gains yesterday. By the end of the day, GME shares went even lower – down 22%.
This Bloomberg article has more details: GameStop Sinks on Plan to Borrow $1.3 Billion to Buy Bitcoin. Excerpt:
The video-game retailer erased a quarter of its value on Thursday, shedding $3 billion in market capitalization in its largest drop since last June. The rout came after the company, on Wednesday afternoon, announced plans to sell $1.3 billion in convertible bonds to fund Bitcoin purchases as it embraces a strategy that was developed by the cryptocurrency advocate Michael Saylor.
When the company made an initial announcement about its Bitcoin strategy on Tuesday afternoon, it sparked a rally in the shares, that brought the stock up by the time the markets closed on Wednesday. But the additional information about the bond sale soured the sentiment around the stock.
Also, a hat tip to a number of readers who pointed out that 42% of GameStop's net income last quarter came from interest on its cash – not earnings any investor should place a multiple on.
As I said yesterday, GameStop appears to be speculating on bitcoin. I continue to think this stock is neither a good long nor short... But it's fascinating to watch!
2) Meanwhile, software maker AppLovin (APP) – another company I've warned my readers about many times (most recently on March 6 and March 7) – plunged more than 20% yesterday after one of the most respected activist short sellers, Carson Block of Muddy Waters Research, issued a damning report on it.
Here's a Bloomberg article with more on the story: AppLovin Shares Sink After Muddy Waters Issues Short Report. Excerpt:
It's at least the third report from a short seller in about a month. In February, Fuzzy Panda and Culper Research both published short reports against the company, which provides marketing services to app developers, sending shares lower. Those reports came just days after The Bear Cave issued its own cautious piece against AppLovin shares.
AppLovin was one of the top-performing technology stocks in 2024, gaining more than 700% in a meteoric rise driven by the artificial intelligence frenzy. The stock was added to the Nasdaq 100 Index in November, further boosting gains and pushing it to a market valuation of more than $110 billion at the end of the year.
You can read Muddy Waters' entire 50-page report here: Approving: Deep Data Analysis Shows APP is Just Another Scammy AdTech Company. Summary:
Muddy Waters is short APP. Web traffic analysis leads us to estimate that ~52% of [APP's] e-commerce conversions are retargeting and incrementality is only ~25%-35%. Code evidences that APP is collecting and structuring user IDs from its key platform partners, which appears to be a major violation of the platforms' terms of service (TOS). APP therefore, in our opinion, could be deplatformed, similar to Cheetah Mobile. If APP is not deplatformed, logically, numerous competitors will start copying APP's techniques because there is little technology involved. APP's advertising clients are likely sensitive to actual incrementality, which should frustrate APP's growth plans. We have already observed e-commerce client churn of ~23% in Q1.
Continue to avoid this stock!
3) Speaking of things to avoid, it's hard for me to think of a worse idea than allowing small investors to speculate in high-risk, high-reward private companies – here's a Wall Street Journal article from this week on it: Want to Invest in a Private Company? All It Takes Is $5,000. Excerpt:
Now, all it takes is $5,000 to buy a stake in a firm like artificial intelligence platform Glean or crypto exchange Kraken. EquityZen and Forge Global, which are marketplaces for trading shares of private companies, are lowering the minimum investment from tens of thousands of dollars, the companies said.
The two marketplaces are also launching a partnership Tuesday with Yahoo Finance, in which they share their data on roughly 100 pre-IPO companies on the website.
This is the investment industry's latest play to put nonpublic companies in the hands of individual investors. Until recently, investing in private companies was the domain of institutional investors and ultrawealthy with the capital and connections to participate in fundraising rounds. Those often require seven-figure minimum investments and decadelong lockups.
And as the article continues:
Private-equity firms also are trying to attract some of the estimated $30 trillion held by U.S. individual investors.
Many nonpublic companies grow faster than publicly listed ones, which can mean higher returns. They also have limited transparency and less liquidity. They can have less stringent financial reporting requirements.
They are "secretive and opaque," said Jeff Hooke, a senior lecturer at Johns Hopkins University's Carey Business School, a critic of private markets.
The promoters of these private companies will share stories like this one on social platform X about Airbnb (ABNB):
However, you can bet that average investors won't be seeing deals like this on EquityZen and Forge Global. Instead, they'll be seeing the dreck.
4) Here's a WSJ article from earlier this week with a longer-term perspective on four COVID-19-era boom-and-bust stocks: What Covid's One-Hit Wonders Should Have Taught Us. Excerpt:
Breakthroughs like AI, quantum computers and 3-D printing induce a fear of missing out, sending too many stocks rocketing higher. They give pundits something to talk about, brokers the next thing to sell and asset managers an excuse to launch new funds.
Covid beneficiaries were like those thematic stocks on steroids, jumping at the same time in a way that looks silly with the benefit of hindsight. Investors treated their sales gains in 2020 and 2021 as if they would keep going. Even if that were possible, competitors pounced on the same opportunities. Companies that sold in-demand physical goods during the emergency even cannibalized their own future demand...
Sometimes a company's fortunes really do change overnight. Investors lucky enough to own their shares still need to go back to the basics of what gives them value – decades of future cash flows. If it is hard to argue that the price gain reflects a business opportunity that is big and sustainable enough, then the next step is clear: Take the money and run before others figure it out too.
And take a look at this chart from the article:
I haven't looked at Wayfair (W) or Chewy (CHWY), but I think Peloton Interactive (PTON) is interesting. David Einhorn of Greenlight Capital recommended it at the Robin Hood Investors Conference on October 23 (I wrote about it in my October 29 e-mail), and I shared an update on March 17.
And I've liked Zoom Communications (ZM) – in fact, my team and I recommended the stock in the June 2024 issue of our flagship newsletter, Stansberry's Investment Advisory. As we concluded at the time...
The market wildly overshot to the upside with Zoom during the pandemic boom. Now, it has overshot to the downside. That gives us a chance to own this market-leading, high-quality business at a valuation that's far too low.
Since our recommendation, ZM shares are up 22%.
Investment Advisory subscribers can read our full write-up on Zoom here. If you aren't a subscriber, you can find out how to become one – and receive a year of our best monthly ideas, plus instant access to our full portfolio of open recommendations and specific advice on those positions – right here.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.